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Are service charges a necessary evil?

PW speaks to homeowners and experts to find out what they think about these recurring fees

Property Weekly

We invest in property to create an asset that will increase in value over the years. However, hidden fees and recurring costs can sometimes add considerably to the cost of the property, making it less attractive as a long-term investment. Among recurring costs, service charges are usually the “bad guys”, not just in Dubai but all around the world.

There is a persistent debate about the necessity of this “evil”, given its good and bad effect on property. While on the one hand service charges are necessary to maintain common areas and amenities, on the other hand they can significantly impact rental yield and saleability.

PW speaks to experts, landlords and homeowners to find out ground realities about how the service charge has evolved.

Fee or contribution?

A service charge is a fee paid by a property owner to either a developer or an owners’ association (OA), primarily for maintaining the common areas of a building or community, including indoor and outdoor elements like corridors, elevators, landscaping, security, swimming pools, etc.

“[A service charge is] a periodic fee or expense that is required to keep a real estate entity functioning,” explains Colin Dowall, Head of Property and Asset Management at JLL Middle East and North Africa. “These charges only pertain to the common areas, such as gardens and hallways. Service charges benefit all occupiers by providing lighting in common areas, cleaning, refuse collection, window cleaning, security, staff costs, property management expenses, sinking fund contributions and mechanical, electrical and plumbing maintenance.”

The service charge is deposited in the OA’s account as income of the building or community, says Srinivasan Krishnaswamy, Vice-President of Business Development and Strategic Planning at Deyaar. “Additionally, a certain sum is allocated and kept aside as reserve fund for major long-term expenses that may arise out of general wear and tear of the building and related assets.”

Computation

While the fee is computed annually per square foot, payments are often made in installments. “It is an annual amount, however, in the vast majority of cases, the payments can be broken down into part payments throughout the year,” says Paul Kelly, Operations Director of Allsopp and Allsopp.

Consumers largely perceive service charges as an add-on cost to property maintenance. While many are not clear about the various components the fee includes, some owners say the fees are for “services we are not even using”. Furthermore, most people PW spoke to were not aware that waste removal from building sites was one of the services covered by the fee.

Is it part of the unit cost?

Experts clarify that service charges are not a component of the actual property price or valuation, and cannot be a part of its profitability. However, they do advise potential buyers to account for service charges as the annual maintenance cost for the upkeep of the property.

“A service charge is not a payment, so it cannot be classified as rent unless it is expressed as such in the reddendum of the lease,” says Dowall. “Neither the landlord nor property manager is expected to profit from the service charges. Ideally, the service charge cost should be equivalent to the operating expenditure of the asset.”

Despite a standardised definition for service charges, there is a huge discrepancy in fees across Dubai, depending on the development or even type of property within the same development or community. The fees range from Dh78 per square foot for the Armani Residences in the Burj Khalifa area, with an average of around Dh50 per square foot for the entire Downtown Dubai area, to around Dh6.5 per square foot in areas such as International City.

Interestingly, while International City enjoys the lowest service fee, industry reports indicate that it boasts the highest net yield of over 8 per cent, compared with 5 per cent in Downtown.

So why do service fees vary so much? The difference lies mainly in the type, quality and quantity of services being offered, from security and landscaping to pool maintenance. For example, areas with multiple swimming pools have a higher service charge ratio compared with those with one community pool. Similarly, the scale of landscaping can directly impact the cost of maintaining the property, which would cover the number of gardeners, the quantity of plants and watering requirements.

Benefits and drawbacks

Experts point out that the upkeep of general areas collectively benefits everyone and is essential to extending the life of the building or community and the common assets enjoyed by all residents. Kelly says the main benefit of the service charge is that it “pays for clean, tidy and secure communities”.

Sachin Bhardwaj, an apartment owner in Dubai Motor City, says service charges are necessary to maintain the quality of life that some communities offer. “It helps communities like Motor City offer a fantastic quality of life to its residents. The fact that Motor City is consistently being voted as the most popular community for the lifestyle it offers is primarily because of the way it is maintained.”

Consumer views are overall favorable, with most in agreement that service charges provide the necessary funds for the maintenance of their assets, while adding value from a commercial perspective. “If a property is in good condition, the value will be higher,” says Sathish Jeyakumar, owner of a two- bedroom apartment in Jumeirah Village Circle.

However, the most common complaint of residents is that they often end up paying more than what they get in return. This can be true to occupiers who might not be using certain facilities. Kelly cautions that residents unhappy with the charges could potentially create much bigger service issues. “When this happens, it results in people withholding payments, which results in contractors not being paid and, therefore, work not being done,” says Paul.

However OAs that take on the responsibility of balancing funds and services hold the key to this problem. “The best example I have seen of this is in Victory Heights, where the owners control the budgets for everything, have full authority over contractors and service providers and can make sure that they are getting value for money.,” says Kelly. “The OA in Victory Heights will quite often waive the fourth quarter service charge payments if they already have sufficient funds. I’m personally not aware of any other community where this happens, but it should be what all communities aim for.”

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